The Federal Reserve has been setting new baselines all year and last week was no exception. With new power and influence, the Federal Reserve is proposing a new set of credit lending rules that are rattling bankers from coast to coast.

Fed Chairman Ben Bernanke wants to put predictability back into banking costs where credit cards are concerned. The Federal Reserve is setting a new baseline for fairness in banking practices in issuing late fees, unfair interest rates, allocation of payments using balances with different rates, excessive fees, unfair computing of balances and deceptive practices. According to the Federal Reserve:

Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.

Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.

Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.

Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.

Banks would be required to provide consumers a reasonable amount of time to make payments.

The proposal also includes limiting the fees of subprime credit cards by limiting the fees. Banks that make firm offers of credit advertising multiple rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest rate and highest credit limit.

The rules are available for public comment now. Bankers are arguing that the new rules don’t allow proper pricing for risk and threaten higher costs for all customers. The truth is that bankers are going to be expected to play by a tighter set of rules with more consumer rights and protection.

Without question, these rules are a great move forward for the consumer. If implemented, they will save consumers from surprise rate increases on their existing credit card balances. They will make it fairer and easier to pay credit card bills on time. The rules will keep a credit card company from using confusing methods that unfairly maximize interest charges.

But do these rules go far enough? In our opinion, no. There are still serious gaps in credit card policies that result in exorbitant, usury rates for the consumer.

Specifically, there are two areas that are left uncovered: unusually high fees and extraordinary interest rate increases for late or missed payments.

Fees for late payments, bounced checks, etc, have trended upward in recent years. A charge of $39 or more for a late payment is not unusual. Consumer groups have long argued that the true cost to a bank for a late payment or a bounced check is only a few dollars. Banks disagree, but the fact is that these fees and penalties have become a large source of revenue for banks.

If you want to see the true cost of a late payment, see our article at http://www.nativestar.org/index.php?pr=14CCGuide which documents how a single bounced check to a credit card company cost $126 in fees. Keep in mind that we are not talking about a series of checks bouncing. The $126 in fees was for one single check bouncing. To put that into proper banking language that anyone can understand, “WOW!”

Secondly, it is understandable that a bank might charge a penalty interest rate for missed payments. After all, missed payments can indicate a possibility of a credit risk or a default on the balance. But what rate is reasonable? We have seen credit card terms stating that you will have penalty interest rates as high as 34.99% for missed payments. This is a rate that would have been considered usury only 50 years ago.

At what point do we say there must be a cap on these fees and penalties? Does it really cost the banks this much or are they merely profiting off of the mistakes of consumers. Certainly it should be possible to determine a fairer rate that will take into account credit risk without making an undue burden on the consumer.

One thing that is important to remember is that these penalty fees and rates are not really competitive. Yes, it is true that you will see them when you apply for a credit card. But the banks know the psychology of the consumer: “It won’t be me, I never make late payments, I never bounce a check, so it is not my concern.” You are not concerned about these fees, because it is human nature to think that it will not happen to you. This is someone else’s problem. There are other things that you take into consideration when you compare credit cards, but penalty assessments are only a minor issue, if an issue at all.

We also must keep in mind that consumers really don’t take take the time to read and analyze all the terms and conditions. You can tell the consumers that they must, that this is their legal agreement with the bank, but let us face reality. A large percentage of consumers, perhaps a majority do not take the time to read all the fine print. This means that their must be regulations. People assume that the government has set fair maximum limits for penalties and fees. Then they are shocked when they make a mistake and are hit with these extraordinary fees.

One article mentioned that banks are relying on these penalties as a source of revenue because the credit cards have become so competitive that banks need to find new profit centers.

All right, but here is our solution: Put a cap on penalty fees and interest rates that is in line with the true cost to the banks for late payments, bounced checks, etc. All banks will be making the same revenue from penalty assessments, essentially just enough to cover their costs. By establishing a set cap for all banks, we will create a level playing field, wherein all banks can compete equally.

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